South Korean Won to U.S. Dollar 1-Year Cross-Currency Basis

The cross-currency basis is the deviation from covered interest parity (CIP) in the market for swapping Korean won into U.S. dollars. Covered interest parity is the no-arbitrage condition that borrowing dollars directly costs the same as borrowing won and swapping them into dollars on a fully hedged basis. Under CIP the basis is zero, and a negative basis means obtaining dollars synthetically through the swap market carries a premium over borrowing them directly (Du, Tepper, and Verdelhan 2018). This series is the basis at the 1-year tenor, the most liquid and the international benchmark, reported in basis points.

A more negative reading is the market's sharpest real-time signal of dollar-funding pressure. Korea runs a structurally negative basis. The 1-year tenor is the most sensitive to short-horizon funding stress, where rollover and hedging demand for dollars concentrates and where constrained intermediary balance sheets bind first (Sushko et al. 2016).

The basis is a direct difference of two quoted swap rates at the matched tenor, with no estimation or model layer.

(1) Mid pricing. The cross-currency interest-rate swap (CCIRS) and the won interest-rate swap (IRS) are reduced to mid quotes,

(2) Basis construction. The basis is the CCIRS mid less the IRS mid at the same tenor,

Both legs are quoted semiannual on an Actual/365 day count, so no day-count or compounding conversion is applied.

(3) Sign and units. Under covered interest parity the basis is zero, and a negative value is the CIP deviation signalling a premium on synthetic dollar funding. Stored in percentage points, the series is displayed in basis points,

so lower readings indicate tighter dollar funding.

The 1-year basis is the front line of dollar-funding stress for the Korean economy. Du, Tepper, and Verdelhan (2018) show that the post-2008 CIP deviations are large, persistent, and systematic, unexplained by credit risk or transaction costs and concentrated where banking regulation binds bank balance sheets. The basis has thus become the price of scarce intermediary capacity rather than a textbook arbitrage residual.

Two forces set its level, demand and supply. On the demand side, Korea's standing need to obtain dollars synthetically, driven by institutions hedging large foreign-currency asset books, holds the basis negative even in calm conditions. The International Monetary Fund (2019) shows that an economy's net-foreign-asset position proxies this hedging demand and is negatively correlated with its basis. On the supply side, the dollar itself proxies the risk-taking capacity of the intermediaries who would otherwise close the gap. Avdjiev et al. (2019) document a triangular relationship, where a stronger dollar coincides with a wider basis and a contraction in cross-border dollar lending, and Cerutti, Obstfeld, and Zhou (2021) confirm that the cross-section of deviations tracks macrofinancial determinants.

The 1-year tenor blows out hardest in crises. The 2007 money-market turmoil spilled into the FX-swap and cross-currency-swap markets as dollar funding shortages drove marked CIP deviations (Baba, Packer, and Nagano 2008). The won–dollar swap market dislocated severely during 2007–2009 (Baba and Shim 2010), and Yu (2010) traces the won's swap-market deviations to global risk and funding conditions. It is read alongside the 5- and 10-year basis to separate the structural component from this short-horizon signal.

For funding and hedging desks the 1-year basis is the most direct read on the cost of synthetic dollar funding over the coming year and on the carry of hedged cross-border positions. A more negative basis raises the all-in cost for won-based investors of hedging dollar assets and rewards holders of dollars who can lend them into the swap market (Du, Tepper, and Verdelhan 2018).

Because it is the most liquid tenor, the 1-year basis is the cleanest real-time barometer of won dollar-funding stress, and it transmits global funding strains into Korean markets through the dollar channel (Avdjiev et al. 2019). Its sharpest moves coincide with global dollar shortages, where the official sector has historically supplied the missing international dollar liquidity through central-bank swap lines (McGuire and von Peter 2012; Allen and Moessner 2010).

It pairs naturally with the KRED dollar-liquidity indicators and with the longer basis tenors, the former to distinguish a genuine funding-scarcity signal from transient frictions and the latter to separate cyclical stress from the structural demand imbalance.

Over 5968 observations from 2002-02-21 to 2026-07-01, the unit-root reading of the one-year won-dollar cross-currency basis is ambiguous, since the Dickey and Fuller (1979) and Phillips and Perron (1988) tests reject a unit root at p = 0.0111 and p = 0.0038 while the Kwiatkowski et al. (1992) test also rejects stationarity at p < 0.01, the near-unit-root disagreement of a persistent bounded signal, so no clean order is assigned. On the level the first-order autocorrelation is 0.994 with an implied half-life of about 121.3 observations, a descriptive persistence summary and not an integration claim, the Ljung and Box (1978) portmanteau on the level rejects white noise at lags 10 and 20, Q = 56498.30 and Q = 108196.00 at p = 0.000 and p = 0.000, and the Bai and Perron (1998) procedure, by the Bai and Perron (2003) algorithm, finds 4 breaks in the mean at 2007-08-10, 2011-12-05, 2015-07-17, 2019-04-12 (Andrews 1993; Perron 1989).

This signal, the one-year won-dollar cross-currency basis, has no daily seasonal period, so the seasonal-unit-root and seasonal-stationarity machinery of Hylleberg et al. (1990) and Canova and Hansen (1995) is deliberately not run (Beaulieu and Miron 1992; Ghysels and Osborn 2001).